Stockton, Calif., sold about $125 million worth of bonds in 2007 to obtain cash to close a shortfall in its pension plans for current and retired city workers, but the strategy backfired and is partly the reason the city is now in chapter 9 bankruptcy, according to a New York Times analysis today. Stockton is trying to walk away from the pension obligation bonds and to renegotiate other debts during its chapter 9 proceeding. After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, finance Prof. Jeffrey A. Michael of the University of the Pacific concluded that "Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk." Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.
